Professional services firms see expansion

Professional services firms in the Ninth District grew over the past year and anticipate continued expansion at their firms, according to a survey by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development.

Over 370 firms in accounting, engineering, graphic design, marketing, consulting and other professional services across the Ninth District responded to the survey, conducted in May and June. The survey asked respondents about their experience over the previous 12 months, as opposed to the calendar year, and their outlook for the coming four quarters.

For the most part, the past year was a financial success for professional services firms in the region. The accompanying chart presents survey results as a “diffusion index,” which indicates an increase or decrease on average over the previous four quarters. Values above 50 indicate expansion; below 50 indicate contraction.

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Roughly two in five firms reported increased sales over the past year, while a third saw steady sales. Business services employment and productivity also expanded over the period. Profits, in contrast, were flat on average, with roughly equal proportions of businesses saying they increased, decreased or stayed the same.

Many firms also noted an increase in input costs and the prices they charge for services. In response to a separate question, most reported that credit conditions were a minor factor in hiring or capital spending decisions.

However, one in four said that labor had become less available, while only 5 percent reported an increase in labor supply. Wages and benefits each rose 2.5 percent on average, according to respondents.

Going forward, services companies are optimistic about the coming year. In the survey, more firms anticipate increased revenues and profits over the next four quarters than expect declines. Productivity and employment are also expected to increase, on balance, though a majority of firms expect these indicators to stay level.

About a quarter of firms intend to raise prices, while only 6 percent expect to cut prices. Planned price hikes may in part be a response to higher costs; 42 percent of firms expect to pay more for inputs, while only 3 percent foresee reduced costs. Most anticipate modest wage increases; over the next four quarters, firms expect wages to increase by an average of 2.3 percent and benefits by slightly less.

Regarding general economic conditions, the number of professional services firms expecting employment in their states to rise over the next year was more than four times the number predicting a drop. Corporate profits and consumer spending were also expected to increase across district states.

Finally, a majority of respondents predict higher inflation over the next 12 months; only 2 percent believe that inflation will fall.